February 22, 2013 04:25 p.m.
Your Retirement Finance Week in Review
A couple of factors were at work in the markets this week.
After opening the year with seven weeks of gains, including the strongest January since 1997, many investors were looking for a reason to sell. They got it with the release of the Federal Reserve Open Markets Committee minutes. As happened last month, the media and many investors overplayed the minutes, reading them to say that the Fed is likely to tighten monetary policy sometime during 2013. That’s a poor reading, just as it was last week. The Fed is going to keep its current policies for a while. St. Louis Fed President James Bullock said so on CNBC Friday morning, and that’s probably why stocks had good gains on Friday.
The other factor is that consumers finally are showing the effects of some recent contractionary events. The most important of those probably was the expiration of the payroll tax holiday on Jan. 1. It took a few weeks, but data and anecdotes now indicate that consumers are adjusting spending to reflect lower take-home pay. Other fiscal austerity measures also are kicking in, and others are on the way, especially the federal spending sequester. Higher gas taxes also are pinching demand for other goods and services.
This is why I’ve been cautious at the opening of 2013, despite the large amount of cash that was accumulated at the end of 2012 and the sharp rally in stocks to open the year. These austerity measures will reduce growth below what it would have been during the next few months. I think after that it likely will be clear sailing for much of the rest of 2013. But we’re going to have a bumpy ride and a few scares in February and March.
The Data
This was another light week for the economic data.
The biggest news probably was in manufacturing. Before this week, it appeared manufacturing was recovering from the late 2012 slump. Businesses looked to be increasing their demand for equipment. But two reports this week were very disappointing.
The Philadelphia Fed Survey, which is considered a good measure of national manufacturing trends, dropped sharply and was well below consensus estimates. The only good things that can be said about the report are that it was only one month and one region. The PMI Manufacturing Flash Index for the first half of February, however, is a national survey. It showed manufacturing declining only a small amount and only slightly below expectations.
Even so, since some investors were looking for a reason to take profits, the manufacturing data triggered a decline in stock indexes for Thursday.
The inflation reports were released this week and showed inflation under control in January. In fact, the price increases are under the Fed’s target and indicate there’s as great a risk of deflation as there is higher inflation in 2013. The Consumer Price Index was flat for January and under 2% for the last 12 months.
The housing data released this week was slightly disappointing after a year of almost steady improvement. Existing home sales, housing starts, and the builders’ Housing Market Index all were down and below expectations. The movement wasn’t great or a cause for alarm. But they do pull in the reins on the most bullish analysts. A shortage of housing inventory was cited for depressing a lot of the figures. The main effect of the housing numbers is to remind people that while housing is better we’re a long way from a boom. The absolute numbers still are at depressed levels after a year of improvement, and the market is handicapped by tight lending standards and a large minority of owners who are underwater and therefore unable to sell their homes.
The Leading Economic Indicators compiled by the Conference Board were up slightly and just below expectations. It continues to point to slow, steady growth.
New unemployment claims were 20,000 higher than last month. There were some distortions because of the holiday last week. The report indicates that there hasn’t been much of a change in the labor market.
The Markets
It was a bad week for most assets. Gold took another tumble. Last week, Tocqueville Gold triggered its sell signal. This week, iShares COMEX Gold Trust closed one penny above our sell below price before recovering a bit to close the week. The bounce off that bottom was fairly strong, so it might indicate a bottom. There are anecdotes that the decline in gold was due to a few hedge funds or other large investors selling. For the week gold was down a bit over 2%, and we’ll keep watching to see if a sale from our portfolios is triggered.
Other commodities also sank. Energy-based commodities did worse after many weeks of good gains. They closed down about 2.5%. Broader-based commodities did a little better, losing about 1.75% for the week.
The dollar did very well, climbing about 1.25% for the week.
The few other winners for the week were bonds. Treasury bonds gained almost 0.75%. Investment-grade corporate bonds returned around 0.33%, and Treasury Inflation-Protected Securities (TIPS) earned 0.25%. High-yield bonds just barely eked out a gain.
Despite Friday’s strong returns, stocks lost money for the week. The Dow 30 did the best, coming in just at break even. The S&P 500 and the All-Country World Index tied with losses of 0.50%. They were down 1.5% at their lows for the week. The Russell 2000, a top performer so far this year, lost about 1.25%. Emerging market equities did the worst, losing about 2%.
Some Reading for You
Why are gas prices rising despite all the new drilling in the U.S.? This story covers all the reasons, though it gives far too much credence to the notion that speculators are to blame.
Alan Greenspan receives a lot of blame for the financial crisis. He gives a history of the events plus other issues in this summary of a recent speech.
Howard Marks of Oaktree Capital is one of the better long-term investors around. You will benefit from reading this interview.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
February 15, 2013 04:25 p.m.
Your Retirement Finance Week in Review
It was an extremely quiet week both in the markets and for economic data. The big news was made in speeches by Fed officials and in the President’s State of the Union address. None of them moved the market for more than a short time.
The most significant speech probably was by Janet Yellin, vice chairman of the Fed. She likely will replace Ben Bernanke as chairman at the end of his term. Yellin made clear that the employment situation in the U.S. is well below what it should be and that the Fed is likely to continue its quantitative easing programs until there’s a meaningful improvement in hiring. She isn’t concerned about inflation but wants more aggressive fiscal policy from Congress and the administration.
Some other Fed speakers were more restrained during the week, but they either don’t have votes on the current board or are in the minority.
So, Fed money will continue to flow into the markets and the economy for some time. The question for investors is whether these will lead to an unrelenting rise in asset prices or investors will decide that prices are too high even when backed by the Fed’s money printing. As I pointed out in recent weeks, it appears that investors are becoming more discriminating. Instead of all asset prices rising, some are rising (mostly stocks) and others are in trading ranges or declining. That’s likely to be the pattern for the next few months.
The Data
It was a very quiet week for data.
Probably the big number was retail sales. These grew at a far slower rate than in recent month, though they did meet expectation. Averaging the gains over the last few months, recent retail sales growth still is good. Most likely, consumers pulled back in January because of the expiration of the payroll tax reduction and because of the political disruptions in Washington. My guess is that it will take consumers a few months to adjust to having take-home pay reduced by 2%. That will reduce sales and economic growth some. But things will pickup after the adjustment period, because of higher home and stock prices.
The National Federation of Business optimism index increase slightly but was a little below expectations. Its overall level remains at economic contraction levels. This demonstrates that the recovery still is uneven with small businesses largely being left behind, or at least they aren’t doing well enough to feel optimistic.
New unemployment claims declined to below 350,000. That is much better than recent numbers and than expectations. This is the first time in a while that this report isn’t affected by special factors, so it could indicate improvements in the labor market.
The first manufacturing report of the month, the Empire State Manufacturing Survey, was strongly positive and well above expectations. This was one of the lagging reports that indicated manufacturing overall was mixed. If this trend continues and is joined by the Philadelphia Fed survey, the manufacturing data will be positive rather than mixed.
On the other hand, the Industrial Production report declined after several months of increases. Expectations were for an increase similar to prior months. Manufacturing was the major cause of the decline. But this follows two strong months. Coupled with the Empire State report and other recent data, it shouldn’t be taken as an alarm that manufacturing is turning down.
Consumer sentiment as measured by the University of Michigan rose and was above expectations. But consumers still are climbing out of the hole they fell into at the end of 2012. All readings are below the levels of last October and November.
The Markets
The markets were very quiet for the week.
The big mover was gold, and it fell significantly. It closed with a 2.5% loss. Tocqueville Gold declined below the “sell below” price and was sold out of our model portfolios during the week. Energy-based commodities recovered from a sharp decline on Thursday to close with a 0.5% gain. Broader-based commodities lost about 0.75%.
Stocks had a mixed week. The widely-followed S&P 500 was in a trading range and closed with a very small gain of just over 0.25%. Global stocks as measured by the All-Country World Index gained 0.25%, while the Dow 30 did slightly better than breakeven. Emerging market stocks did well early in the week and were in a trading range the rest of the week for just below a 0.75%. The week’s leader was small company stocks as measured by the Russell 2000 with a gain of almost 1.25%.
Bonds are a good example of how investors are starting to discriminate among assets. Long-term treasury bonds had a sharp loss early in the week and recovered a bit to close with a 0.50% loss. Investment-grade corporate bonds were in a trading range and lost almost 0.25%. The dollar was in a trading range and had a slight gain. High-yield bonds had the best week, gaining almost 0.50%.
Some Reading for You
Paul Farrell of MarketWatch.com had a good piece this week on the value of forecasts and common mistakes investors make.
There’s a lot of discussion about all the cash on corporate balance sheets. FTAlphaville puts the different sides in perspective and has a good take on the issue.
Above I mention Janet Yelling speech this week. Here’s a link with more.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
February 8, 2013 04:25 p.m.
Your Retirement Finance Week in Review
There wasn’t much economic data issued during the week, and markets generally were quiet. This is a good time to observe a pattern in the year’s markets.
For probably the first time since the central banks started their extreme quantitative easing, there’s divergence between assets. They aren’t all moving up and down together. So far in 2013, emerging market stocks are down about 3%, and long-term treasury bonds are down more than 2%. Investment-grade corporate bonds, high-yield bonds, and treasury inflation-protected securities (TIPS) also all are negative for the year.
But commodities, other than gold, are up about 4%. Most U.S. stock indexes are up around 4%, and the Dow 30 and Russell 2000 are up more than 4%. The All-Country World Index of stocks is up only 2%.
I suspect the risk on, risk off trading pattern of the last few years could be behind us. Central banks essentially have promised to print money in large quantities indefinitely. With that issue settled, investors are looking at differences between assets and countries. They favor U.S. stocks, because the U.S. economy is doing better than others. Bonds are declining, because investors are looking for something other than safety.
A lot of cash is going to move in 2013. If central bankers can continue to keep the world’s problems from growing into another financial crisis, investors will add stocks and perhaps other assets to their portfolios. There also are signs that businesses finally might be investing in new capital and equipment. If both these trends continue, 2013 will be a transition year from the financial crisis and deleveraging to a sustainable economy and bull market that rely less on central bank manipulation.
The Data
There wasn’t a lot of data this week. A few reports are worth noting.
I don’t usually follow the international trade report, but the report for December showed a sharp, unexpected decline in the trade deficit. Because the initial GDP number released last week used an estimate of trade that showed a larger deficit, this change alone should cause a revision that will turn the GDP number positive, depending on how other items are revised.
But the trade number isn’t very impressive. The introduction of the latest iPhone in November caused that month’s deficit to expand, and part of the December gap reduction was due to the absence of the iPhone surge. But the iPhone change wasn’t the only factor. An increase in exports and other factors were positive, but they weren’t as positive as the headline number indicted.
Another surprise was a sharp 2% decline in productivity due to lower output and higher compensation. The fiscal cliff fears in December probably distorted the number. Output likely was restrained because of fears about higher taxes and lower sales if Congress didn’t reach a resolution. Compensation also was artificially high because of payments moved forward into 2012 to avoid 2013’s higher taxes. We need to wait another quarter to see if this report identified some new trends or if it really was distorted by the fiscal cliff issue.
The Factor Orders report was mixed. Orders rose but by less than expected. The good news in the report, which I’m watching closely, is good growth in new orders for capital goods, which indicates businesses are spending on capital equipment. Overall factory orders and manufacturing data in general have been flat since mid-2012. A fresh surge in manufacturing would be a big boost to economic growth.
The non-manufacturing segment of the economy continues to grow, as measured by the ISM Non-Manufacturing Index. The employment index segment of the report was particularly strong.
The Consumer Credit report had a good headline number, but wasn’t as positive behind the headlines. Credit grew a little more than expected. But most of the credit growth is in auto loans and especially student loans. These forms of credit growth don’t indicate that consumers are optimistic and willing to take on much debt. That’s wise fiscal policy for most of them, but it keeps a lid on economic growth.
New unemployment claims continued their strange behavior of 2013. The previous week’s claims were revised higher, and last week’s claims came in at a slightly improved 366,000. But claims still are well above the very positive numbers of a few weeks ago and seem to have settled back into a range of 360,000 and above, which is too high to reduce unemployment.
The Markets
The markets were fairly quiet for the week, probably consolidating after the big moves in January. But the changes still were interesting.
Stocks were set up for their first losing week of 2013 but recovered near the end. The S&P 500 led the way with a 0.75% gain. Small U.S. stocks as measured by the Russell 2000 were a shade behind, and the Dow 30 finished with a 0.50% gain. International stocks didn’t do as well. Global stocks as measured by the All-Country World Index had a slight gain for the week. Emerging market stocks had a surge on Friday that prevented their being the worst performing assets for the week, but they still lost 0.50%.
The dollar had a very strong week, rising over 1% as measured against the U.S.’s seven leading trade partners’ currencies. This is due mostly to a very weak yen and some flight from the euro. Overall it was a bad week for bonds. High-yield bonds lost almost 0.50%. TIPS lost a small amount. Long-term treasury bonds recovered from losses early in the week to gain 0.25%, and investment-grade corporate bonds followed the treasuries most of the week to eek out a slightly higher gain.
Commodities had some sharp moves during the week, but both energy-related commodities and gold ended the week without no change. Broader-based commodities declined most of the week and finished with more than a 1% loss.
Some Reading for You
There are several elements to stock market returns: dividends, growth, valuations, and others. This piece from PIMCO does a good job explaining them and putting them into a forecast.
The rise and fall of investment clubs is instructive for investors. Read some details about it here.
The Great Rotation is the catch phrase so far in 2013. Here’s a good exposition of it.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
February 1, 2013 05:40 p.m.
Your Retirement Finance Week in Review
As usual, investors and the media focused this week on two data reports that historically are inaccurate and not good measures of current or future economic conditions. These were the GDP and employment conditions reports. I discuss the details of these reports below. For now, investors should know that these reports routinely are revised, and the revisions can be substantially different from the original reports that moved markets. The revisions can come a couple of years after the reports were issued. That’s one reason the National Bureau of Economic Research, considered the official designators of recessions and recoveries, won’t identify a recession until at least six months after the beginning date.
You can see this at work in Friday’s employment reports. The number of jobs created for January was below expectations. But the numbers for last month, which also were disappointing, were revised sharply higher. Yet, markets reacted to today’s disappointing number and other details. Investors are convinced investors will keep pumping money into the economy for some time.
These reports move markets in the short-term, but they shouldn’t. Investors need to know that. Only short-term traders should be making trades based on these reports. Investors should study their details and history, and that way they can interpret them correctly and use them as one of many investment tools.
More important news, that few investors are paying attention to, comes from the Middle East. The area is in disarray with Iran becoming more powerful, if only because governments are weak or non-existent in Iraq, Syria, Mali, Libya, and elsewhere. There’s the potential for things there to spiral out of control, leading to broader wars, disruptions to the global economy, and more. Markets move when investors are surprised. I sense investors are becoming more complacent and not assigning any risk to events in the Middle East. The deaths of U.S. diplomats in Benghazi and of international oil field workers hardly moved markets or put investors on alert. If things there don’t calm down, events will happen that move markets.
The Data
The big surprise this week was the GDP report. Expectations were for modest growth in the fourth quarter of 2012. Instead, the headline number was a modest contraction in the economy of 0.1%. This was the first negative quarter since 2008.
But behind the headlines, the report actually was very positive. The negative factors primarily were declines in government spending and inventories. These are two volatile elements of the report and also don’t have good correlations with overall growth. In other words, they tend to be noise instead of information. The decline in government spending was due primarily to a sharp decline in federal defense spending. But this element bounces around on a quarterly basis but over time maintain a long-term trend.
There was good news in the private sector and growth-oriented portions of the report: consumer spending, housing, and business investment. The other consumer demand reports have been positive for several months. These reports were confirmed in the GDP data. Business investment and production has been more uncertain when all reports are examine, but the GDP report summed them up in a modestly positive report. If the growth in business investment and production continues we’ll have sustainable economic growth, at least as long as the Fed keeps its policies in place. Take out the volatile elements, focus on households and businesses, and GDP growth looks more like 2.5% or higher.
Several other reports during the week supported the GDP’s positive data on business investment and production. Durable Goods Orders rose sharply and above expectations. This was distorted somewhat by volatile aircraft orders. But even after excluding transportation, orders rose 1.3%, exceeding expectations and last month’s revised report.
The Dallas Fed report generally has been more positive than other regional banks’ manufacturing surveys, and that continued this month. It was positive and above expectations across the board. The Chicago Purchasing Managers’ Index also rose sharply to 55.6. The report had sharp increases in new orders and employment. The PMI Manufacturing Index showed a modest increase. But the ISM Manufacturing Index showed a strong gain for January. Taken together, the manufacturing data indicate there’s modest growth which might be accelerating as the new year began.
The Personal Income and Spending report was distorted by the fiscal cliff situation. Personal Income rose sharply because of special dividends, bonuses, and other payments being accelerated into the end of 2012 to avoid higher taxes in 2013.
This element of the report is worth dwelling on. Cash balances increased in the last months of 2012 to much-higher-than-usual levels. All this cash now is being reallocated by individuals and businesses. As you can see from January’s stock market returns, a lot of it went into stocks. Prices are going to rise for the assets to which this cash is reallocated until the reallocation is done.
The rest of the Personal Income and Outlays report indicates that inflation is under control, well below the Fed’s target rate. Consumer spending also had a strong increase in December. The consumer spending and income data aren’t consistent with recent consumer sentiment surveys, but that could be due to all the publicity about the fiscal cliff depressing the surveys.
On that point, Consumer Confidence as measured by the Conference Board declined sharply and well below expectations to 58.6. The report was weak across the board. This could reflect the fiscal cliff debate, discussions about other issues in Washington, and the expiration of the two percentage point payroll tax cut. The report is not consistent with recent consumer spending. The Bloomberg Consumer Comfort Index is consistent with the Consumer Confidence Index. But the University of Michigan Consumer Sentiment Index for mid-January was positive. The other measures of consumer sentiment covered December, so it could be there was a dramatic turn in consumer outlook after the turn of the year.
There were only a couple of housing reports this week. Pending home sales declined and were less than expectations, breaking several months of positive housing data. The decline was attributed to a low inventory of homes for sale. This is likely to be a problem for a while, as about 40% of homeowners have modest equity or negative equity in their homes and so won’t sell unless they have to.
The Case-Shiller Home Price Index confirmed an annual price increase in its 20-city composite of 5.5%. The index is above its artificial highs of 2010, induced by the temporary home buyer’s credit and is the highest level since the 2006 peak. If home prices continue to increase that will induce more homeowners to put their homes on the market. But higher interest rates could reduce what buyers are willing to pay.
New unemployment claims rose significantly and were above expectations, breaking several weeks of lower claims. This trend was somewhat supported by the Employment Situation reports on Friday. On the negative side of the report, fewer jobs than expected were created, the unemployment rate increased, and hours worked were down slightly. But average hourly earnings were slightly above expectations, and the numbers of jobs created in December was revised sharply higher.
I don’t pay a lot of attention to the Employment Situation report because it is revised so much. But the markets react to it. This week’s reaction viewed this slightly negative report as positive, because it indicated the Fed will continue its robust monetary expansion for a while.
I think the more important data for the week were in manufacturing and elements of the GDP report. It looks like the modest growth of 2012 will rise to a higher rate in the first part of 2013, and businesses could be starting to invest in capital equipment. For now, the private sector is growing faster than it has in years. I’m hopeful that businesses will invest in expansion and cause that growth to continue.
The Markets
Stock markets and other risk markets had a strong January, one of their strongest in some time. I believe the reason is revealed in the Personal Income and Spending report discussed above. A lot of cash was raised in late 2012 in anticipation of tax rate increases. This cash now is being reinvested and created a pop in the markets. Some analysts are referring to the January surge as a rotation from bonds to stocks. But I don’t think that’s the case, and PIMCO reported that has not been the case among their mutual funds. Their investors aren’t moving from bond funds to stock funds. Instead, cash is coming out of money market funds and similar investments to buy stocks.
The question is how long this can last. If businesses begin to invest some of their cash in expansion, employment will increase. That will trigger higher economic growth. Otherwise, this is a short-term blip that will reverse course once either the cash reserves from 2012 are reinvested or market valuations become too high.
The strongest performers of the last week were commodities. Energy was the top returner, with a gain of about 2.5% and steady increases all week. Broader-based commodities were close behind with less than a 2% gain. Gold didn’t do as well. It had a strong surge early in the week but gave back some of the gains for a 1% weekly gain.
The dollar and long-term treasury bonds both had a bad week. The dollar lost about 0.75%. The treasury bonds had a good day on Thursday but gave back all of those gains and more after Friday’s data were reported, losing 1.5%. Investment-grade bonds also lost money, about 1%. High-yield bonds lost about 1.25%.
Stocks were up and down all week but finished with a gain after threatening to have their first negative week of 2013. Emerging market equitie
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